![](https://hackmd.io/_uploads/BJKK28e7j.png) # Sequoia RMBS ## Mortgage Loans Background Material (I) ## 1. Redwood’s Experience Purchasing Residential Mortgage Loans The information in this section aims to provide an overview of Redwood’s experience in and process for sourcing, evaluating and acquiring mortgage loans generally. We believe this information is relevant in evaluating our proposal for MakerDAO to onboard Sequoia RMBS (which we refer to herein as the “project”) because the performance of these securities will be dependent on the performance of the mortgage loans backing these securities. As described above, Redwood’s Sequoia platform has been active as an issuer of RMBS for over twenty (20) years. Dating back to its earliest RMBS issuance activity, Redwood has focused on acquiring jumbo mortgages considered to be of “prime” or “super-prime” credit quality for inclusion in its Sequoia platform. Redwood does not itself originate residential mortgage loans. The terms "prime" and "super-prime" are commonly used to describe mortgage loans made to mortgagors considered to have strong credit. This type of mortgagor is considered likely to make loan payments on time and likely to repay the loan in full and, therefore, less risky to lenders and investors. Prime and super-prime mortgagors typically have credit profiles that show a strong history of using credit wisely and handling loans responsibly. As a result, their credit scores fall at the higher end of the spectrum. A prime credit score usually falls somewhere in the 680 to 740 range and super-prime is scored at 740 or higher. (For further information on categorization of credit scores, please see the Consumer Financial Protection Bureau’s (CFPB) biennial report, [“The Consumer Credit Card Market”](https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf)). By way of comparison, the weighted-average credit score of the loans in Sequoia RMBS typically falls between 760 and 775. ![](https://hackmd.io/_uploads/BkXFqLe7o.png) The term “jumbo” describes the size of a mortgage loan – a jumbo mortgage loan has a balance that exceeds specific levels that make loans eligible for purchase by Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that purchase most of the mortgage loans secured by single-family-homes in the U.S. A “prime jumbo” loan is a loan made to a prime credit quality mortgagor with a balance in excess of the GSEs’ eligibility thresholds. As further detailed below, Redwood has built a reputation for the quality of the prime and super-prime jumbo loans that we acquire and securitize. Our ability to evaluate the creditworthiness of loans we purchase relies on the approval process we apply to loan originators who wish to sell us loans and our credit policy guidelines. We will examine each of these in turn. * **Seller approval process**: Redwood purchases loans from a small group of well-established originators (“Sellers”). The types of approved Sellers Redwood buys loans from include banks, mortgage companies and credit unions with established origination channels and a demonstrated ability to source, underwrite and fund prime jumbo loans. <br><br>Redwood’s Seller approval process includes a review of the Seller’s historical business and financial results, loan sourcing channels and risk management practices, and compliance operations and appraisal review processes. A review of the historical performance of a cohort of a prospective Seller’s recently originated prime jumbo loans is also conducted. Additionally, each Seller must demonstrate and maintain an ongoing minimum net worth above a threshold set by Redwood. Following approval, Redwood generally re-evaluates Sellers on an annual basis. * **Credit policy guidelines**: Redwood has established conservative credit policy guidelines against which each loan offered for sale to Redwood is reviewed against. While many of our competitors have, in the ensuing years, increasingly relied on automated review processes (“AUS”), Redwood makes limited use of AUS and limited review processes and has continued its long-established practice of primarily purchasing fully underwritten loans. “Underwriting” describes the process whereby an experienced mortgage credit professional analyzes the personal financial information of a mortgagor and the mortgaged property to evaluate whether or not the mortgage loan satisfies the criteria required to be considered for acquisition by Redwood. At a high level, the underwriting process consists of three categories of analysis: capacity, credit and collateral. * Capacity: an assessment of the mortgagor’s ability to repay a loan by comparing the mortgagor’s sources of monthly gross income against the mortgagor’s total monthly recurring debts. This results in a numerical figure called the debt-to-income (DTI) ratio. The underwriter also considers assets like bank accounts, 401(k) and IRA accounts and determines the amount of post-close liquid reserves that will be available to the mortgagor should the need arise. * Credit: a review of the mortgagor’s use of credit and history of repaying debt. A combined credit report from the three national credit reporting agencies — Equifax, Experian and Trans-Union – is used to give the underwriter visibility into how much credit the mortgagor has taken on, what the terms of repayment were and whether the mortgagor timely made all payments as agreed. * Collateral: analysis of the home’s value using appraisal tools, and a review of the loan amount against that value. A loan-to-value (or LTV) ratio is calculated and is an important tool for investors like Redwood to evaluate whether, if the loan defaults, there is likely sufficient value in the property for the mortgage debt to be repaid. As an additional step in Redwood’s quality control processes, a legal document review of each mortgage loan acquired by Redwood is conducted to verify the accuracy and completeness of the information contained in the mortgage notes, security instruments and other pertinent documents in the file. Following acquisition of any mortgage loan to be included in a Sequoia securitization, Redwood engages a third-party nationally recognized underwriting review firm to assess whether such mortgage loan was originated in compliance with applicable law and regulations. The DQ statistics included in the table titled “2018-2021 Prime 2.0 Performance Summary by Shelf (August 2022 Remit)” available for review in [Sequoia RMBS – Proposal Background & Considerations](https://hackmd.io/@allangiraf/Reedwoodconsiderations) may be relevant in evaluating the quality of mortgage loans previously purchased by Redwood using the processes and procedures outlined above. That table indicates how often mortgagors whose loans were included in prior Sequoia RMBS transactions have become a month or more delinquent. A mortgagor’s inability to make payments of principal and interest on time may indicate a lack of capacity in such mortgagor’s finances and may be indicative of such mortgagor’s potential ability to make payments on its loan in the future. ## 2. Regulatory Regime Applicable to the Mortgage Loan Pool Mortgage loans are subject to a variety of regulations promulgated by state and federal regulatory entities. Applicable state laws generally regulate interest rates and other charges, require certain disclosure, and require licensing of lenders. In addition, other state laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the origination, servicing and collection of mortgage loans. Mortgage loans are also subject to various federal laws, including (1) the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to mortgagors regarding the terms of their mortgage loans; (2) the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act, in the extension of credit; and (3) the Fair Credit Reporting Act, which regulates the use and reporting of information related to the mortgagor’s credit experience. Redwood does not directly originate residential mortgage loans. The mortgage loans we purchase for subsequent sale or securitization are required to be underwritten and serviced in compliance with applicable federal and state laws and regulations. Redwood’s Residential Mortgage Banking business (which includes the Sequoia platform) engages third-party due-diligence vendors to evaluate loans offered for purchase and review compliance with applicable law and regulations. We have consistent application testing of our processes for review that the loans we purchase were originated appropriately and in accordance with applicable laws and regulations. Redwood also receives a representation and warranty from each Seller that each mortgage loan was originated in compliance with applicable federal, state and local laws and regulations. Redwood utilizes third-party servicers to service loans where we own the servicing rights and maintains a servicing oversight function to monitor their performance and compliance with applicable laws and regulations. Certain Redwood subsidiaries also hold and maintain state licenses related to our mortgage banking activities. ## 3. Ownership and Oversight of the Mortgage Loan Pool Following established industry conventions for the issuance of RMBS, on the closing date, Redwood will sell the pool of mortgage loans to a company acting as depositor for the transaction (for more information on the depositor, see the discussion of [Sequoia platform counterparties](https://hackmd.io/@allangiraf/RedwoodCounterparties). The depositor will then sell the mortgage loans to the trustee to be held in trust for the benefit of MakerDAO and any other investors in securities issued in that transaction. Each of these sales of the pool of mortgage loans is intended to be structured as a “true sale,” meaning an absolute and unconditional sale of the mortgage loans to the respective transferee. In the event of a bankruptcy of Redwood, the depositor or an originator, it is not anticipated that the trust would become part of the bankruptcy estate of such entity and a legal opinion will be issued to that effect. The Sequoia RMBS generally will be entitled to payments from the pool of mortgage loans and will not be entitled to payments in respect of the assets of any other trust established by the depositor. The only source of cash available to make interest and principal payments on the securities will be the assets of the trust. The trust will have no source of cash other than collections and recoveries on the mortgage loans through insurance or otherwise and monthly advances funded by the servicing administrator, the master servicer and the securities administrator (as applicable), or funded by a reduction in amounts otherwise distributable to the servicing rights strip, each of which amounts are reimbursable to the respective advancing parties. Following the sale of the mortgage loans to the trustee described above, a third-party servicer will be responsible for servicing the mortgage loans pursuant to an existing servicing agreement. The servicer will have primary responsibility for servicing the mortgage loans, including, but not limited to, all collection and loan-level reporting activity, maintenance of custodial and escrow accounts, maintenance of insurance and administration of foreclosure proceedings with respect to the mortgage loans and the mortgaged properties, in accordance with the provisions of the servicing agreement. Redwood, as servicing administrator, will oversee certain matters relating to the servicing of defaulted mortgage loans including, but not limited to, approving certain loan modifications, reviewing environmental reports relating to foreclosed properties to determine whether to proceed with a foreclosure, approving certain actions relating to the management of REO property and approving the release of the original mortgagor in connection with mortgage loan assumptions. A master servicer will monitor the servicer’s and servicing administrator’s performance and carry out the servicer’s and servicing administrator’s obligations under the servicing agreement to the extent set forth in the transaction documents. In accordance with customary practice in the RMBS market, it is anticipated that the contracts that are expected to be entered into in connection with the Sequoia RMBS project will be governed by New York law. For more information on the depositor, see the discussion of [Sequoia platform counterparties](https://hackmd.io/@allangiraf/RedwoodCounterparties). --- ###### **(I)** The information contained herein is provided solely for informational purposes to determine preliminary interest in investing in a transaction with the general characteristics described in these responses and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or to participate in any trading strategy. If any offer of securities is made, it will be made pursuant to a preliminary offering memorandum (the “Preliminary Offering Memorandum”) and a final offering memorandum (the “Final Offering Memorandum”) in the future, prepared by or on behalf of an issuing entity which will contain material information not contained herein and which will supersede, as to any securities offered, the information provided herein in its entirety. Any decision to invest in thefuture in any securities offered in the future should be made after reviewing the Final Offering Memorandum, conducting such investigations as MakerDAO as an investor deems necessary and consulting the investor’s own legal, accounting, and tax advisors in order to make an independent determination of the suitability and consequences of an investment in the securities. <br><br>We note that (i) any transaction in securities is subject to a risk of loss, and possibly total loss, of principal, (ii) the information contained herein and risks described herein do not purport to identify every possible risk (direct or indirect) or other material considerations, which may be associated with your entering into a transaction in the future for the purchase of securities and (iii) any securities offered in the future will not have been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any state or foreign jurisdiction and may not be offered, sold or otherwise transferred unless an exemption from registration under the Securities Act and all other applicable securities laws is available. <br><br> We note, furthermore, that our responses contain information accurate as of the date of this document. While we welcome comments from and dialogue with the community as our proposal is evaluated, information in this response generally will not be updated and therefore may not reflect the most current information about the subject matter discussed herein. <br><br> Past performance is no guarantee of future results.